Is HSA withdrawal counted as income for ACA?

[fh2000]

For the past few years, we are using ACA as our health insurance. We keep our income low to maximize the subsidy. We do about $20,000 Roth conversion and collect another $10,000 income/dividend as income.

Right now, we have about $20,000 worth of receipts we can use to withdraw from HSA account. Though that is a non-tax event for federal, it is taxable for California. But, is this action also counted as income for ACA?

If that is the case, we will then stop Roth conversion this year, and simply use HSA withdrawal as the ACA income.

 

[Done]

In California, a withdrawal from an HSA is not a taxable event. Instead, the account is treated as a regular account with no tax advantages. If you are selling securities in the account at a profit, the profit is taxable, but the withdrawal of funds is irrelevant.

Pretend an HSA is a regular brokerage account for California purposes. Contributions to the account are not tax-deductible (and therefore have to be added back to Federal income as an adjustment). Income and capital gains/losses within the account are taxable. You won’t receive a 1099-INT/DIV/B so reporting and cost-basis tracking must be done manually.

 

[Done]

Distributions from an HSA for qualified medical expenses are not included in Federal gross income or AGI. They are also not added back in by the MAGI calculation for ACA purposes.

 

[fh2000]

In California, a withdrawal from an HSA is not a taxable event. Instead, the account is treated as a regular account with no tax advantages. If you are selling securities in the account at a profit, the profit is taxable, but the withdrawal of funds is irrelevant.

Pretend an HSA is a regular brokerage account for California purposes. Contributions to the account are not tax-deductible (and therefore have to be added back to Federal income as an adjustment). Income and capital gains/losses within the account are taxable. You won’t receive a 1099-INT/DIV/B so reporting and cost-basis tracking must be done manually.

Contributions were made years ago, and were shown on W2 in federal returns in those years. Can you clarify your statement above this is what you mean, or in future return a new adjustment has to be made again?

 

[cathy63]

Contributions were made years ago, and were shown on W2 in federal returns in those years. Can you clarify your statement above this is what you mean, or in future return a new adjustment has to be made again?

I am not the one you asked, but I do have an HSA and do live in CA, so I'm pretty familiar with this. If all of your contributions were made via payroll deduction or employer contributions, then as long as your state income shown on your W-2 was entered correctly on your CA tax returns, your contributions were taxed correctly.

Hopefully you invested those HSA funds and have been earning interest, dividends and cap gains while the money has been sitting in your account. Every year, you are supposed to take the December statement from your HSA provider and manually add the income you received during that year to your CA return and pay taxes on it.

If you now sell some of your investments in order to make a withdrawal, then you have to calculate the capital gain on that sale yourself and you will also have to report that gain as income on your 2023 CA taxes when you do them next spring.

You will not get a nice 1099-B that will help you report the cap gains, so save the monthly statement that shows the sale along with the year-end statement and use them both to complete your state return next year.

 

[Spock]

I am not the one you asked, but I do have an HSA and do live in CA, so I'm pretty familiar with this. If all of your contributions were made via payroll deduction or employer contributions, then as long as your state income shown on your W-2 was entered correctly on your CA tax returns, your contributions were taxed correctly.

Hopefully you invested those HSA funds and have been earning interest, dividends and cap gains while the money has been sitting in your account. Every year, you are supposed to take the December statement from your HSA provider and manually add the income you received during that year to your CA return and pay taxes on it.

If you now sell some of your investments in order to make a withdrawal, then you have to calculate the capital gain on that sale yourself and you will also have to report that gain as income on your 2023 CA taxes when you do them next spring.

You will not get a nice 1099-B that will help you report the cap gains, so save the monthly statement that shows the sale along with the year-end statement and use them both to complete your state return next year.

oy! that one oughta be added to the move-out-of-CA thread!

 

[Done]

Contributions were made years ago, and were shown on W2 in federal returns in those years. Can you clarify your statement above this is what you mean, or in future return a new adjustment has to be made again?

Employer contributions to the HSA should have been untaxed federal income, but taxable income for California. Hopefully it was done correctly at the time. Once the account is funded, you just need to report annual income and gains/losses for state taxes.

If you make any individual contributions to the HSA (up to the annual limit, with the correct health plan), you get to exclude that amount from income for federal taxes, but it gets added back in as a California adjustment.

In any case, the federal AGI is the one used for the MAGI calculation to determine ACA premium credits.

 

[qwerty3656]

I'm really confused by this thread. My understanding is that HSA withdrawals for qualified medical expenses are not considered income - even in California

 

[teej1985]

I'm really confused by this thread. My understanding is that HSA withdrawals for qualified medical expenses are not considered income - even in California

HSA withdrawals would not be taxed in California - that would just be a money transfer.

Interest, Dividends, Capital Gain Distributions, and realized capital gains within an HSA would be taxable in California.

 

[RetiredAndLovingIt]

oy! that one oughta be added to the move-out-of-CA thread!

Good point.
And to add insult to injury, they don't allow you to file your state tax for free on the FTB website if you have an HSA. So because I have a tiny interest amount on my HSA I had to pay Turbo Tax $25 to file it for me so I could move on with my life. I ran into that issue last year as well so either I'm misunderstanding their rule ( and I could be) or they changed something.

 

[rodi]

Holy crap. I have not been doing an annual reporting on my HSA. Quicken never asked me about it... Oye.

Question - I didn't open an HSA till after I retired and went on the ACA for insurance. So all the contributions were mine, and post tax. I see reference to employer contributions - none of those for me.

Do I need to go back and amend my taxes from 2015 on to report any cap gains? Only withdrawals have been for qualified medical stuff... I thought (silly me) that it worked like a Roth - the growth was tax free....

Oh boy.... Looks like I made a mess.

 

[cathy63]

Holy crap. I have not been doing an annual reporting on my HSA. Quicken never asked me about it... Oye.

Question - I didn't open an HSA till after I retired and went on the ACA for insurance. So all the contributions were mine, and post tax. I see reference to employer contributions - none of those for me.

Do I need to go back and amend my taxes from 2015 on to report any cap gains? Only withdrawals have been for qualified medical stuff... I thought (silly me) that it worked like a Roth - the growth was tax free....

Oh boy.... Looks like I made a mess.

Quicken or TTax? If you used TurboTax to prepare your tax returns and entered a Federal deduction for the HSA contributions, then it automatically adjusted your California income correctly.

It's hard to say if you should amend the CA returns ... it depends on the amount of missed income and whether it makes a difference in your actual tax liability. For CA, you can only amend 2018 and later, and you have to send in paper returns. At AARP Tax-Aide, our policy is we only amend if the taxpayer has missed at least $200 of income.

 

[cathy63]

oy! that one oughta be added to the move-out-of-CA thread!

Just make sure your destination is not New Jersey, New Hampshire or Tennessee!

 

[fh2000]

Employer contributions to the HSA should have been untaxed federal income, but taxable income for California. Hopefully it was done correctly at the time. Once the account is funded, you just need to report annual income and gains/losses for state taxes.

If you make any individual contributions to the HSA (up to the annual limit, with the correct health plan), you get to exclude that amount from income for federal taxes, but it gets added back in as a California adjustment.

In any case, the federal AGI is the one used for the MAGI calculation to determine ACA premium credits.

Thank you for the confirmation that HSA withdrawal is not included in MAGI for ACA. Looks like, I still need to do my small Roth conversion in order to meet my income requirement, plus I can do HSA withdrawal this year.

 

[daver]

I'm using TurboTax and need to report HSA interest income for CA State. Since there is no 1099-INT from HSA custodian, what is the best way to enter this income in TT? Do I have to go to forms and enter this manually?

 

[teej1985]

Holy crap. I have not been doing an annual reporting on my HSA. Quicken never asked me about it... Oye.

Question - I didn't open an HSA till after I retired and went on the ACA for insurance. So all the contributions were mine, and post tax. I see reference to employer contributions - none of those for me.

Do I need to go back and amend my taxes from 2015 on to report any cap gains? Only withdrawals have been for qualified medical stuff... I thought (silly me) that it worked like a Roth - the growth was tax free....

Oh boy.... Looks like I made a mess.

You're most likely not the only one. If it's de minimis, I wouldn't worry about it too much.

 

[cathy63]

I'm using TurboTax and need to report HSA interest income for CA State. Since there is no 1099-INT from HSA custodian, what is the best way to enter this income in TT? Do I have to go to forms and enter this manually?

It's in the interview screens for California. There's a section where it asks you about the items that California handles differently from the Fed.

I'm not on my regular computer right now, but I can look at it later and give you the exact info for the desktop software. I don't use TTOnline, so that might be a bit different.

 

[Lakedog]

Just make sure your destination is not New Jersey, New Hampshire or Tennessee!

Tennessee did away with their tax on dividends/interest in 2021 so no longer any tax on HSA earnings.

 

[Done]

I'm using TurboTax and need to report HSA interest income for CA State. Since there is no 1099-INT from HSA custodian, what is the best way to enter this income in TT? Do I have to go to forms and enter this manually?

In desktop TurboTax under State Taxes/California/Income and adjustments you’ll see topics for Health Savings Account (HSA) Contributions and Earnings. Contributions should already be populated from the federal information. Under Earnings you can enter interest, dividends, and capital gain/loss.

 

[daver]

It's in the interview screens for California. There's a section where it asks you about the items that California handles differently from the Fed.

I'm not on my regular computer right now, but I can look at it later and give you the exact info for the desktop software. I don't use TTOnline, so that might be a bit different.

Yes using the desktop TT. Found it Thanks...

In desktop TurboTax under State Taxes/California/Income and adjustments you’ll see topics for Health Savings Account (HSA) Contributions and Earnings. Contributions should already be populated from the federal information. Under Earnings you can enter interest, dividends, and capital gain/loss.

Good to go. Thanks...

 

[Morgan22]

Tennessee did away with their tax on dividends/interest in 2021 so no longer any tax on HSA earnings.

New Hampshire is following the same path for their dividend/interest tax. In 2022 the rate was 5%, and then 4% in 2023, 3% in 2024, 2% in 2025, 1% in 2026, and then completely repealed after 2026.

Also in NH, you currently only need to file if your D&I is $2,400 or greater for singles, or $4,800 or greater for MFJ.